Buy Baidu as advertising revenue returns, AI projects grow: KeyBanc

  • KeyBanc Capital Markets upgrades its rating on shares of the Beijing-based company to overweight from sector weight.
  • Analyst Hans Chung points to the company’s healthier advertising revenue as well as its progress in artificial intelligence.
  • Shares rose in premarket trading following the report, adding to the stock’s gain since January.

Chinese internet search behemoth Baidu is poised for stronger revenue as advertising on its news feed improves, spelling further upside for investors, according to KeyBanc Capital Markets.

The bank upgraded its rating on shares of the Beijing-based company to overweight from sector weight on Monday, predicting that between its rising ad sales and outlook in artificial intelligence, Baidu could be set for a year of growth.

“Our upgrade is based on observations of a change in the prospects for the outlook for Baidu Core business in the near to midterm,” analyst Hans Chung said in a note to clients. In addition to the healthier ad revenue, the analyst said Baidu’s Phoenix Nest system – a new machine learning online marketing system – could drive incremental revenue gains from search queries and improve conversion rates.

“The new system could better match ads to users through targeting capabilities on a real-time basis and self-improved manner, which drive incremental ad inventory without increasing ad loads,” he wrote. “Despite unfavorable secular trends in search traffic, we believe the new system can deliver growth in paid clicks and revenue with potential upside in the future.”

Baidu, which last provided investors an update on its earnings in April, said at the time that the search firm’s news feed received a surprising bump in the first quarter due to a crackdown by Chinese internet regulators on low-brow content, disrupting several competitors.

The unexpected boon comes two years after censors hampered Baidu’s performance after a widespread review of advertising practices, which eroded its marketing client base and froze its revenue growth.

Since then, the company has sold or exited a number of businesses to concentrate on ventures in artificial intelligence and its news feed.

The analyst’s 12-month price target of $305 is 21 percent higher than Friday’s closing price.

“According to checks from our field work, we see a stronger ramp in news feed ad revenue driven by higher user engagement with daily active users of 150 million as of June and 30 percent year over year growth of total time spent in the second quarter of 2018,” Chung added.

He estimated Baidu’s daily revenue could reach ¥60 million ($9 million) by the end of this year, about double from last year. He increased the forecast for news feed revenue to ¥14.1 billion in 2018 and ¥22.6 billion in 2019, from the previous forecast of ¥12.0 billion and ¥19.6 billion, respectively.

Shares rose 3.6 percent Monday following the KeyBanc report, contributing to an 11.3-percent climb since January. Baidu is expected to report second-quarter earnings on July 26.

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